Business Formation Matters

March 23, 2013

When starting a business, one thing that you need to think about is the type of business you would like to create. The most commonly known type of business is a called a corporations, but there are also other other types of businesses such as partnerships. And within each type of business, there are subsets, such general partnerships versus limited partnerships. Each title comes with a different set of responsibilities and liabilities. That is why it is important to look at each business options and figure out which options are best for your needs. Once you decide on a business type, you need to register it properly. An improper registration, can cause problems such as making you personally liable for your business transactions when that was not your intent or it can allow clients and vendors to cancel contracts. While there are some mistakes that are minor and fairly easy to fix, it will still be time consuming and often costly.

Take, for example, this California case where an improper registration almost cancelled the partial sale of a company. In this case, Howard and Jane Farnsworth bought John and Velma Dawson's interests as limited partners in Nevada-Cal Management, Ltd. ("Nevada-Cal"). Nevada-Cal is a limited copartnership made up of bother limited and general partners. The Farnsworthes sued Nevada-Cal because after they purchased the Dawsons' shares, they learned the limited partnership was not properly formed. Because the partnership was improperly formed, the Farnsworthes believed that the sale of the limited partnership interests were invalid, and therefore wanted their money back.

Under California law, at the time of this case, all companies were required to have a permit before they could sell security, which included partnership interests, without a permit. There were exceptions in place, but specifically for properly formed general and limited partnerships. In deciding this case, the judge not only looked to the relevant laws in place, but also to the intent of the writers of the law. The judge found that the purpose of the law was to protect the general public against scheming companies, not an individual in a private sale. In small sales, individuals have the ability to ask questions directly to the seller, or its representatives. When companies make securities available to the public, the public only has the public filings from the previous year and whatever the company divulges in the investment packet. If someone has a specific question, it is not guaranteed it will be answered. Requiring permits is one more way for the public to find out more information about a company on its own. Because of this, the judge decided in favor of the Dawsons, finding a permit unnecessary and making the sale valid.

Doing it correctly the first time is always best. Having an attorney with experience creating businesses can help with that. An attorney can help you decide which type of business is best for your needs and register it properly. If you need a business lawyer in the Sacramento area, please call our Sacramento business attorney.